Geopolitical Turning Points and Oil Price Responses: An IV-LP Approach

Saadaoui, Jamel (2025): Geopolitical Turning Points and Oil Price Responses: An IV-LP Approach.

Abstract

This paper introduces a novel identification strategy of geopolitical turning points, defined as sharp, unanticipated inflection points in bilateral relations. These shocks are measured using the second difference of the Political Relationship Index (Δ²PRI), an event-based monthly index derived from Chinese sources. Unlike standard geopolitical risk indices, Δ²PRI isolates events that represent exogenous shifts in diplomatic relationships. Using quantile IV-local projections, the paper studies the causal and asymmetric impact of these shocks on global oil prices. An improvement in US–China relations reduces oil prices by 0.2% in the short run and raises them by 0.3% in the medium run, with effects varying across the oil price distribution. The extension to the Japan–China dyad supports external validity. The Δ²PRI instrument offers a reusable framework for analyzing bilateral political shocks across various macroeconomic outcomes, making a methodological contribution to the international economics literature.

• Item Type: MPRA Paper
• Language: English
• Keywords: Geopolitical Risk, Oil Prices, Quantile Local Projections, Instrumental Variables.
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C26 - Instrumental Variables (IV) Estimation; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F5 - International Relations, National Security, and International Political Economy > F51 - International Conflicts ; Negotiations ; Sanctions

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